Air NZ keeps balance sheet plump, holds back on dividends as fleet renewal looms

Friday 30th August 2013

Air New Zealand opted to limit dividend payments in its latest year, even as it generated record operating cashflow, piled up cash on its balance sheet and pushed gearing below its target range as a buffer against fleet renewal and volatile fuel costs.

The state-controlled airline will pay a final dividend of 5 cents a share, making 8 cents for the year, up 45 percent from a year earlier. Yet its dividend payout ratio dropped to 49 percent from 85 percent in 2012

Net profit more than doubled to $182 million in the 12 months ended June 30, as the airline lifted passenger revenue, kept costs under control and benefited from favourable foreign exchange movements. Operating cash flow jumped to a record $750 million, allowing it to increase cash holdings by 12 percent to $1.15 billion, while gearing fell to 39.1 percent - below its 45-55 percent target.

The dividend payment "will raise eyebrows," said Rickey Ward, head of equities at Tyndall Investment Management. "Even taking into account the increased level of debt for new aircraft they appear to remain comfortably inside imposed guidelines."

Ward has no argument with the latest results, which beat market expectations, saying it is "always refreshing to see a NZ company do well in a highly competitive arena on the global scene."

Air NZ shares gained 2.2 percent to $1.42 on the NZX today and have gained about 40 percent in the past 12 months, outpacing the NZX 50 Index's 25 percent gain.

The airline is among companies slated for a selldown by the government, which owns about 74 percent currently, and that overhang may be restraining the stock's performance, Ward said.

Air NZ shares trade at a relatively modest 2014 price-to-earnings ratio of 5.8 times, once its stake in Virgin Australia is stripped out, according to Craigs Investment Partners analyst Christopher Byrne. Rival Qantas Airways trades at a PE of 17.6 times, according to Reuters data.

"While we acknowledge the volatility of Air New Zealand's earnings, its multiples are undemanding and the business appears well poised to take advantage of increasing global and domestic travel," Byrne said in his post-earnings report. He reiterated his 'buy' recommendation on the stock and lifted his forecasts for pretax earnings for 2014 and 2015 by 1 percent and 11 percent respectively, after the results.

Still, he says, Air NZ is being "prudent" in not upping its dividend payout ratio, given the historical volatility of earnings, exposure to oil prices and currency movements and capital expenditure of aircraft.

The airline plans to invest $1.8 billion on 21 aircraft over the next three years and total aircraft capital commitments amount to about $2.1 billion by 2017, according to Byrne. That spending is likely to push Air NZ's gearing back to the middle of its target range at about 50 percent, he said.

The airline's international services reported the strongest improvement in yield in 2013, rising 4.3 percent to 10.6 cents per revenue passenger kilometre (RPK) after rationalising its network, including suspending the Hong Kong to London route.

On the Tasman and Pacific Island routes, yield rose 1.9 percent as the company added capacity.

Total passenger numbers rose 2.2 percent to 13.4 million, outpacing a 1.7 percent increase in available seat kilometres. The load factor rose 0.8 points to 83.6 percent and yield improved 0.9 percent to 13.6 cents per RPK.

BusinessDesk.co.nz

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